AhmadAlbab Bhd, a quoted manufacturer of textiles, has followed a policy in recent years of paying out a steadily increasing dividend per share as shown below:

Year EPS Dividend

2016 11.5sen 5.0sen

2017 12.5sen 5.5sen

2018 14.6sen 6.0sen

2019 13.5sen 6.5sen

2020 16.0sen 7.3 sen

AhmadAlbab has only just made the 2020 dividend payment, so the shares are quoted ex-dividend. The main board, which is responsible for strategic planning decisions, is considering a major change in strategy whereby greater financing will be provided by internal funds, involving a cut in the 2021 dividend to 5sen per share. The investments projects thus funded will increase the growth rate of AhmadAlbabs earnings and dividends to 14 per cent. Some operating managers, however, feel that the new growth rate is unlikely to exceed 12 per cent. AhmadAlbabs shareholders seek an overall return of 16 per cent.

Required:

(a) Calculate the market price per share for AhmadAlbab, prior to the change in policy, using the dividend growth model.

(5 marks)

(b) Assess the likely impact on AhmadAlbabs share price of the proposed policy change.

(3 marks)

(c) Determine the breakeven growth rate.

(3 marks)

(d) Discuss the possible reaction of AhmadAlbabs shareholders and of the capital market in general to the proposed dividend cut in the light of past dividend policy.

(10 marks)

(e) Discuss the arguments in favour of a stable dividend policy

(4 marks)